The 1% Move Report

Wealth Management — October 1, 2021

• US stocks traded higher on Friday as the S&P 500 gained 1.1% to close at 4,357. With the rally, the index is now up 16.0% year to date.   
• US stocks bounced back on Friday after falling three of the past four trading sessions. While stocks rallied on Friday, the S&P 500 Index recorded its lowest weekly return since February of this year, falling 2.2%. Rising Treasury yields in the early part of the week caused technology and growth segments of the market to underperform, which resulted in broad indexes also falling more than 5% off early September highs. Today's rebound appeared to stem from a better-than-expected ISM Manufacturing PMI report, as well as positive trial developments on an oral COVID-19 medicine. As a result, cyclicals and reopen beneficiaries saw strong relative outperformance Friday. Looking ahead, investors will continue to focus on potential risks from Washington, D.C., in the unlikely event that Congress fails to raise the debt limit in coming weeks.
• Ten of the 11 S&P 500 sectors were higher on the session, with Energy (+3.3%) and Communication Services (+1.8%) outperforming the broader market, while Health Care (+0.1%) and Utilities (0.0%) lagged. 
• Rates were lower across the curve, with the 10-year Treasury yield at 1.47% as of the 4 p.m. equity market close. Gold was slightly higher on the day while WTI oil was higher at over $75 per barrel. The US dollar was modestly weaker on the trading session, as measured by the US Dollar Index. 

The S&P 500 rallied 1.1% on Friday, following losses in three of the past four trading sessions. Even with today's rebound, however, the index lost 2.2% on the week, the lowest weekly return since February of this year. It appeared that the catalyst for today's rally was a stronger-than-expected ISM Manufacturing PMI report, which printed at 61.1, ahead of consensus estimates of 59.5; the ISM Manufacturing PMI has now been above 50, or expansionary territory, for 16 consecutive months. Additionally, a large pharmaceutical company announced positive trial results from its oral medicine in helping treat COVID-19 symptoms, which also helped fuel a risk-on rally Friday. Cyclically oriented sectors outperformed, with the S&P 500 Energy sector up more than 3%, while small caps also posted strong gains of nearly 2% (as measured by the Russell 2000 Index). On the week, however, technology stocks bore the brunt of the recent rotation as higher interest rates pressured valuations - the NASDAQ 100's 3.5% weekly drawdown was the lowest since February of this year. While Fed policy was in focus last week with guidance regarding asset purchase tapering, attention this week switched to Washington, D.C., where investors have closely monitored negotiations around the soon-to-expire debt limit. Outside of policy-related risks, Q3 earnings season will begin in earnest in upcoming weeks, which will also garner investors' attention, as potential supply chain and inflation-related risks affect companies' earnings outlooks. 

Record stimulus and a stronger-than-expected US reopening have accelerated the shift from early to mid-cycle, lifting equity markets to new all-time highs. The continued economic momentum in global trade, manufacturing, corporate earnings, and housing have set the tone for strong US economic growth; however, this backdrop has been increasingly priced into markets. Index-level valuations peaked at more than 22x forward earnings and history suggests valuation multiples will trend lower as earnings improve, supporting our base case June 2022 target of 4,225 for the S&P 500 and our bull case of 4,450. With higher expectations and a move into mid-cycle, investors should upgrade their portfolios by dialing back extreme positioning and allocating more exposure toward high-quality cyclicals and growth at a reasonable price. With a potential long-term infrastructure bill in progress, continued Fed accommodation, and the unleashing of pent-up demand for services-related spending, the US faces a potential favorable outlook for economic growth with 7%-8% real GDP this year and inflation possibly rebounding to a 2.5%-3% range over the coming years. However, optimal navigation of this new business cycle will require care as Treasury rates appear likely to move higher toward 2% in the next year, creating a headwind for long-duration assets. With regard to stocks, our preferences for quality and valuation support warrant allocating to international stocks with less expensive valuations, and cyclicals, including financials, which should benefit from the steeper yield curve. Dollar weakness is likely to continue as policy choices are debasing and relative growth outside the US becomes more compelling as the rolling global reopening continues. In fixed income, the challenge is two-fold: Generating sufficient income, while also preserving capital, requires a diversified and active exposure, with our preference toward a mix of high yield credit, preferreds, leveraged loans, asset-backed securities, including select mortgage-backed, and dividend-paying stocks. Real assets such as gold, infrastructure, and real estate present an attractive opportunity as a portfolio ballast for income generation and as an inflation hedge.

Market data provided by Bloomberg.

Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

NASDAQ Composite Index: A broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.

S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

US Trade-Weighted Dollar Index: A weighted average of the foreign exchange value of the 17US dollar against a subset of the broad index currencies that circulate widely outside the US.